Bond Investors See Obama Win Fueling Refi Risk: Mortgages

US President Barack Obama speaks on economy and housing at a residential neighborhood in Las Vegas. Photographer: Jewel Samad/AFP via Getty Images

Nov. 8 (Bloomberg) -- President Barack Obama’s re-election
is fueling investor concern that homeowner refinancing is set to
increase after debt yields tumbled and amid speculation his
administration will pursue more aggressive measures to boost the
housing recovery.

Real estate investment trusts that buy mortgage debt
tumbled the most in a year yesterday on the expectation that
more homeowners would be able to prepay mortgages. The companies
are also being pressured because lower yields on new investments
would squeeze the firms’ earnings and dividends. The policies of
Obama and the Federal Reserve, whose chairman Republican
challenger Mitt Romney had said he would replace, have expanded
opportunities for homeowners to qualify for new loans while
sending borrowing costs to record lows.

‘The continuation of the policies that started last year or
so are basically assured now,” said Vitaliy Liberman, a
portfolio manager at Los Angeles-based DoubleLine Capital LP,
which oversees more than $45 billion.

Government-backed mortgage bonds used by lenders to package
and sell new loans rallied yesterday along with Treasuries, on
speculation Obama’s win will make it tougher for politicians to
avert a so-called fiscal cliff of spending cuts and tax
increases, fueling a flight to the safety of government
securities, and make it easier for the Fed to support the
economy by buying the debt and restraining short-term rates.

Yields on Fannie Mae-guaranteed securities trading closest
to face value, which most affect mortgage rates, fell about 0.07
percentage point today to 2.1 percent as of 5 p.m. in New York,
the lowest since Oct. 12, according to data compiled by
Bloomberg. They tumbled 0.09 percentage point yesterday.

Expanding Refinancing

Obama’s administration may do more to boost housing, which
led the U.S. into recession and is now rebounding after a six-year slump. That recovery helped the president win in swing
states such as Nevada and Colorado.

This includes expanding programs to help homeowners,
including the Home Affordable Refinance Program for borrowers
with little or no home equity. Obama also may consider replacing
the acting overseer of Fannie Mae and Freddie Mac, who has
opposed principal forgiveness on loans they guarantee.

“We view housing as a clear winner following the election
results,” said Edward Mills, an analyst at FBR Capital Markets.

Still, even as housing has shown signs of improvement, 10.8
million Americans owe more on their mortgages than their homes
are worth, according to CoreLogic, Inc., 3.8 million home loans
are at least 90 days delinquent, according to the Mortgage
Bankers Association, and prices are still 29 percent below the
July 2006 peak, according to the S&P/Case-Shiller Index.

‘Challenging Time’

“We’ve been through a very challenging time and there’s a
lot of people still struggling out there,” said Bill Roth,
chief investment officer at Minnetonka, Minnesota-based Two
Harbors Investment Corp., a mortgage REIT with $15.3 billion of
assets. “The administration is still very focused on helping
homeowners, helping borrowers, putting more money in people’s
pockets.”

Two Harbors, which has some investments that could benefit
from housing gains, has also bought prepayment-protected Fannie
Mae and Freddie Mac securities that will help it avoid having to
reinvest in debt at lower rates. It increased its holdings of
bonds backed by loans that have already been through HARP, and
are now excluded from tapping the program again, by $2.1 billion
last quarter.

Bondholders paying more than face value for securities risk
losses if enough homeowners take out new mortgages to repay
their existing debt.

Falling Rates

Rates on 30-year mortgages, which reached a record low of
3.36 percent last month, will probably be 0.1 percentage point
lower under Obama than before the election, Bank of America
Corp. analysts led by Chris Flanagan and Satish Mansukhani wrote
in a report last week. Borrowing costs averaged 3.4 percent in
the week ended today, according to Freddie Mac.

“Treasury rates are falling and primary mortgage rates may
continue to fall as well,” said Walt Schmidt, a mortgage
strategist in Chicago at FTN Financial, the brokerage unit of
First Horizon National Corp. “The market is concerned because
Obama won that he is going to be more inclined to provide
refinancing relief to borrowers.”

Annaly Capital Management Inc., the largest mortgage real
estate investment trust, is bracing for a higher level of
prepayments as Obama continues to adjust policies.

’Policy Meddling’

Under Obama’s leadership, “we potentially see more policy
meddling,” Wellington Denahan-Norris, chief executive officer
of Annaly with $141.6 billion of assets as of Sept. 30, said
this week on a conference call.

Annaly fell 0.2 percent in New York trading, after falling
2.7 percent yesterday. The REIT has declined more than 12
percent since the Fed in September started acquiring $40 billion
of mortgage bonds a month to boost the economy. The Bloomberg
index of REITs rose 0.2 percent today, after dropping 7.8
percent from the Fed’s announcement through yesterday.

Single-family home values are climbing after a six-year
slump as buyers compete for a shrinking supply of properties
listed for sale. U.S. house prices jumped 5 percent in September
from a year earlier, the biggest 12-month increase since July
2006, CoreLogic Inc., an Irvine, California-based real estate
data provider, said this week.

Legislation to expand HARP may not be required as the
program is already exceeding expectations. Refinancing of
higher-rate mortgages driven by the program reached new highs
last month, beating the forecasts of analysts at JPMorgan Chase
& Co., Credit Suisse Group AG, Barclays Plc, and Royal Bank of
Scotland Group Plc.

DeMarco Replacement

The program is already being changed. Adjustments in
September that lowered lenders’ risks of having to repurchase
bad loans because of appraisal mistakes may have fueled some of
October’s gains, Credit Suisse analysts led my Mahesh
Swaminathan and Barclays analysts led by Nicholas Strand wrote
yesterday in reports.

Obama probably will put forward a new head of the Federal
Housing Finance Agency to replace Edward DeMarco, the current
acting director, “as part of a broader package of financial
regulators,” said Isaac Boltansky, an analyst for Compass Point
Research & Trading LLC. The new leaders would not be confirmed
until the second quarter of 2013, he said.

DeMarco has sought to reduce Fannie Mae and Freddie Mac’s
role in the market as lawmakers failed to take action. One
measure has been to increase the fees they charge to guarantee
mortgage securities.

HARP Expansion

“Given that the FHFA has consistently been trying to make
it easier for HARP borrowers to refinance over the last year, we
think that some minor tweaks to HARP will be in the cards even
if Ed DeMarco is not replaced,” Citigroup Inc. analysts led by
Ankur Mehta said.

California Senator Barbara Boxer and Senator Robert
Menendez of New Jersey, both Democrats, have pushed for an
expansion of aid to homeowners.

A bill written by Menendez and Boxer would expand the HARP
program with measures including more relief for lenders from
repurchase requirements.

“The bill is a no-nonsense fix to the HARP program,”
Boltansky said. “While HARP has helped about 1.5 million
people, it still hasn’t come close to its potential. They
estimate 3 million more people will be able to refinance under
this bill.”

Obama’s election also means the mortgage interest tax
deduction probably won’t be touched, said Chris Macke, senior
real estate strategist at CBRE Group Inc.’s global research and
consulting division in Boston. The credit reduces the cost of
owning a home “significantly,” Macke said.